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Difficulty: MediumProhibited Market Manipulation and Fraudulent Practices

A trader enters a series of large, non-bona fide sell limit orders for an equity security with no intention of executing them. The primary objective is to create the false appearance of heavy selling interest, thereby artificially depressing the prevailing bid price so that a pending buy order in another account can be filled at a lower cost. Immediately before the buy order executes, the trader cancels all the sell limit orders. Which of the following market manipulation violations has occurred?

  1. SpoofingAnswer
  2. B
    Wash trading
  3. C
    Backing away
  4. D
    Unauthorized principal trading

Answer

The market manipulation practice described is spoofing.
Spoofing is an illegal practice under federal securities regulations and FINRA rules where market participants enter orders with the intent to cancel them before execution. The underlying motive is to manipulate market prices by giving a false impression of market depth, supply, or demand, allowing another trade to execute on more favorable terms.

Step-by-Step Solution

1
Analyze the trader's intent and order activity.
The trader places orders that are not bona fide, intending to cancel them prior to execution after creating misleading market pressure.
Identifying whether orders are genuine or designed to be canceled to distort price discovery is essential to determining the specific regulatory violation.
2
Distinguish between spoofing and other prohibited market practices.
Spoofing relies on fictitious orders canceled before execution, whereas wash trading involves executed transactions with no beneficial ownership change, and backing away involves failing to honor a firm quote.
FINRA and SEC rules define spoofing specifically based on the non-bona fide nature of the quotes and the intent to cancel before execution.

Key Concept

Spoofing and Non-Bona Fide Order Entry
Estimated Time:1m 0s
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Topics

Prohibited Market Manipulation and Fraudulent Practices